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October 29, 2012 / redman59

Earnings Update in $AAPL and New $IBM Trade

Previously I was long the $AAPL earnings trade as I put in my Twitter timeline.  Thankfully this played out after earnings as we are aware of their miss on EPS and downward forward guidance.  The price action from what I could understand is that it was  “baked” in to the recent selling as the volatility sellers looked like geniuses on Friday’s open.  $AAPL closed at 609.54 on Thursday and opened at 609.43 on Friday, so really no movement at all and predicted by just about no one as many expect a volatile move.

So going into the earnings reaction I posted in a blog this trade that was long the $AAPL Nov/Oct4 550/580 Call Diagonal spread, selling the Oct4 580 and buying the Nov 550 for a 29.20 debit or $2920.00.  The Risk Profile can be shown below:

After the earnings release I decided that I would like to roll the short option to the next month that would increase my profit from positive upside action from a $80 gain to a $280 gain at expiration 11/2 .  I then rolled the short call by buying back the Oct4 580 Weekly call and selling the Nov1 580 Weekly call for a 2.00 credit.  I could have received a better credit by $100 if I would have waited as $AAPL sold off shortly thereafter I rolled the short call, but hindsight is 20/20 and my downside expectations still held.  I have included the order entry as well as the new Risk Profile :

So you can see that the position is still positive and upon Thursday I plan on rolling the short call again to the next month on a dip (given that I am still in the trade).  I will be absent Friday (maybe some mobile trading) so my decision will be made Thursday.

On Friday I also entered into a $IBM 195 Call Calendar and the risk profile can be seen below:

My reason for this trade can be seen below on the chart.  I took into account it’s recent hit on earnings, stabilization, and a technical indicator that proved snap-backs prior occurrences (% above/below 10EMA) as shown in blue highlighted boxes:

So I entered into this position with a half position in case further downside occurred into which I would enter into another Call Calendar.  I want to iterate that this is not a volatility/income edge type play but more of a directional play.  $IBM is one of those stocks that does have a volatility index in itself and looking at the volatility chart you can see that we are in mid-range of recent volatility readings:

I believe that this is a trade that can see upside to $195 and this spread is more of a cost reduction type trade that benefits from time decay and upside action.  In the end I look to take around  25-30% overall profit on this trade.

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